Interesting discussion — and it also shows that the kind of debate we have in Sweden about central bank interest rates and housing bubbles actually is rather common these days …
AEN: Sir John Hicks has portrayed the 1930s as a period of great intellectual battles between what he portrays as the “Hayekians” versus the budding Keynesians. What are your memories of that time?
SHACKLE: Well, I don’t think it can really be said to have started until a small group of us went down to Cambridge on a Sunday afternoon in October 1935. That’s where we heard Joan Robinson and Richard Kahn and really learned about Keynes’s The General Theory. I didn’t really understand what The General Theory was going to be all about until I heard Joan Robinson. I don’t think you can say that a real battle began until after The General Theory had made some impact on us in that way–perhaps not even until after it came out. But up to 1935 there was a strong Hayekian influence at the LSE–people were greatly sold on Hayek’s views as expressed in Prices and Production; I should say that included Hicks and Lerner and Kaldor.
AEN: If you go through the economics journals for the couple of years after the appearance of The General Theory in 1936 and read the reviews of the book, e.g., Hicks’s first review, Frank Knight’s, Joseph Schumpeter’s, Jacob Viner’s, Dennis Robertson’s, and so on down the line, every one of them criticized the book severely. And if one compiles a list of all the criticisms made in those reviews, there is very little in Keynes’s arguments left unchallenged. Yet, within a few years, the book became the volume guiding economic theorists. Given the opposition to it by so many leaders in the profession, why?
SHACKLE: Well, I think the opposition was because the book’s object was to overturn the established theory of value, which it did. I think it’s fair to say that the accepted, the received, theory of value and distribution in those days could not possibly account for involuntary unemployment because its premises included something very like perfect knowledge; and, if everyone had perfect knowledge, why should they have allowed a disaster like the early 1930s? It didn’t make sense. The received theory of value and distribution up to the early 1930s was a theory of perfectly successful adjustment, perfect coordination. And, if things are perfectly coordinated, there’s no reason why anybody should be involuntarily unemployed.
Keynes pointed out that there was this contradiction requiring an explanation and he explained it. His theory of involuntary unemployment is perfectly simple and can be expressed in a paragraph, or in a sentence. If you express it in a sentence, you simply say that enterprise is the launching of resources upon a project whose outcome you do not, and cannot, know. The business of enterprise involves investment, the investing of large amounts of resources–huge sums of money–in things whose outcome you cannot be certain of, which could perfectly well turn into a disaster or a brilliant success.
The people who do this kind of investing are essentially gamblers and they can lose their nerve. And if they decide to withdraw from trade, they sweep their chips up from the table. If they decide it’s too risky, if their nerve gives out and they can’t bring themselves to go on investing, they cease to give employment and that is the explanation. When business is at all unsettled–when there’s any sign at all of depression–or when there’s been a lot of investment and people have run out of ideas, or when their goods are not selling quite as fast as they have been, they no longer know what the marginal value product of an extra man is–it’s non-existent. How can you say that a certain number of men have a certain marginal productivity when you can’t know what the per unit value of the goods they would produce if you employed them would sell for? …
AEN: You have emphasized the importance of expectations–that expectations are a product of an individual’s subjective perception of opportunities laying before him. The argument is made that a problem with radical subjectivists is that it almost seems as if they aren’t sure if reality exists, as if everything is just a product of the mind, totally unrelated to objective reality. How would you respond to that?
SHACKLE: I think that’s the view some take. I can only speak for myself and I don’t say that objective reality doesn’t exist–this is a philosophical problem far out of my depth. But I do think that what we do in our actions is based on what goes on in our own minds, and one way I have tried to put it is that the things which you can choose amongst have to be made by yourself. You can only choose actions and acts. When people say, I’m choosing a new suit, or I’m choosing a house, what they’re really saying is, I’m choosing which one to buy. It’s the actions they’re choosing. I think that the action must be formulated in one’s own mind–it’s a work of art, it’s a work of imagination. Your list of choosable things has to be constructed or composed by yourself before you can choose.
AEN: Some economists would respond by saying that you’ve made this conception so broad, so general, that there’s almost no determinism left in it. You can’t say whether this will happen or that will happen. How would you respond to that?
SHACKLE: In the most radical way, I’m afraid. I think there is pretty complete in-determinacy. I did spend a lot of energy trying to see if I could devise any theory of how expectations are formed and I ended with the conclusion that expectations are far too elusive and subtle to find out any principles or rules to explain their emergence. They’re based on suggestions and you get suggestions from any mortal thing that happens–that you happen to read, that you happen to hear. You get suggestions from anywhere. No mortal person can say where they come from. That, you see, is the trouble.
Economics started as an attempt to imitate physics, Newtonian physics, and I think in doing so, it got off on the wrong foot. You could ask an historian to explain the institutions in England in the eighteenth century, but would you try asking him what is going to happen during the next century? He’d say, “my goodness, man, of course I can’t tell you that!” He’d absolutely reject the notion of that sort of prediction. Well, if an historian can’t do it, why should an economist be able to do it? …
AEN: I take it that you don’t hold much confidence or faith in attempts at economic prediction through econometric techniques.
SHACKLE: No, frankly I don’t. I shall be shot out of the profession even further than I have been already; this will be the end of my career, if it hasn’t ended many years ago. However, I will be honest and say that I don’t think that economics can yield constants of the kind that physics does. Physicists have constants, e.g., the acceleration due to gravity, the table of atomic weights. I don’t believe that economics can have constants like that, You might make measurements which are all right for today. But, there are countless people whose interest it is to make nonsense of those measurements tomorrow. Well, now I have really been quite honest …
AEN: In a sense, what you’re suggesting is that a very large proportion of what has been built up in over two hundred years in economics as a discipline needs to be set aside, that it throws into question the very notion of what most economists view as what is required of economics to be a science?
SHACKLE: I’ve been saying for almost forty years that economics isn’t a science, and we ought not to call it a science.
Den senaste PISA-undersökningen, som kom förra veckan, visar att svenska 15-åringars resultat rasat i matematik, naturvetenskap och läsning.
Och i en färsk SIFO-undersökning visar det sig att 6 av 10 svenskar tycker att ansvaret för grund- och gymnasieskolan ska återföras till staten. Och — kanske intressantast av allt – ALLA riksdagspartiers väljare är för ett återförstatligande.
Enligt Saco:s livslöneberäkningar av hur olika utbildningsval lönar sig sett över hela livet, visar det sig att det är en ren förlustaffär att utbilda sig till lärare. För samtliga lärarutbildningar gäller att de ger en negativ avkastning – de har alltså sämre livslön än de som börjar jobba direkt efter gymnasiet istället för att skaffa sig en högskoleexamen.
Allra sämst löneutveckling har lärare i grundskolans tidigare år. När de går i pension har de tjänat nästan tio procent mindre än klasskamraterna som började arbeta direkt efter gymnasiestudierna.
Höjda lärarlöner är inte en tillräcklig förutsättning för att vi åter ska få en svensk skola av världsklass. Men det är en nödvändig förutsättning! Omfattande skolforskning har övertygande visat att det kommunala huvudmannaskapet är en av de viktigaste orsakerna bakom lärarlönernas och den svenska skolans kräftgång de senaste decennierna.
De politisk partierna måste droppa sina ideologiska skygglappar och inse att en och annan helig ko måste slaktas om vi ska få rätt på svensk skola. Folkpartiet insåg redan för nästan tio år sedan att när skolfakta sparkar så får man vara så god att ändra kurs – även om det eventuellt skulle stå i strid med ideologin. När ska övriga allianspartier och socialdemokratin våga ta det steget? Ska vi verkligen behöva vänta tills nästa PISA undersökning åter igen pekar på svensk skolas katastrofala utförsåkning?
Jag har sagt det förr — och jag säger det igen: kommunaliseringen av skolan är den största floppen någonsin i svensk utbildningspolitisk historia. Men misstag går att rätta till. Som den store engelske nationalekonomen John Maynard Keynes brukade säga: “When I’m wrong, I change my mind.”
Återförstatliga svensk skola!
Thanks to Allin Cottrell and Riccardo Lucchetti we today have access to a high quality tool for doing and teaching econometrics –Gretl. And, best of all, it is totally free!
Professor Lee Adkins now has a new version (1.041) of his Gretl manual to Hill, Griffith & Lim’s Principles of Econometrics (4th ed, 2011), showing the full power of the scripting language of Gretl – Hansl. There is also new material on Monte Carlo simulation, loop constructions etc, that certainly will please the more advanced users. But as in earlier versions, Adkins also amply shows how incredibly easy it is to operate this statistics/econometrics program.
Gretl is up to the tasks you may have, so why spend money on expensive commercial programs?
The latest snapshot version of Gretl – 1.9.14 – can be downloaded here.
So just go ahead. With a program like Gretl and Adkins’s manual, econometrics has never been easier to master!
[And yes, I do know there's another fabulously nice and free program -- R . But R hasn't got as nifty a gui as Gretl -- and at least for students, it's more difficult to learn to handle and program. I do think it's preferable when students are going to learn some basic econometrics to use Gretl so that they can concentrate more on "content" rather than "technique."]
John Taylor and co-writer John Cogan probably reached a low-mark in their economics careers when in an article in WSJ earlier this year they wrote:
Our assessment is based on a modern macroeconomic model … whose features include a recognition that the resources to finance government expenditures aren’t free—they withdraw resources from the private economy. The model provides for other essential attributes of the economy—that consumers, businesses and workers respond to incentives, and they are influenced by their expectation of future economic conditions when making decisions today. None of these features is provided for in old-style Keynesian models.
Really? I guess “Keynesian” at least has something to do with Keynes, so let’s see what Keynes wrote in General Theory. The following passage is in chapter 16:
An act of individual saving means – so to speak – a decision not to have dinner to-day. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence or a year hence or to consume any specified thing at any specified date. Thus it depresses the business of preparing to-day’s dinner without stimulating the business of making ready for some future act of consumption. It is not a substitution of future consumption-demand for present consumption-demand, – it is a net diminution of such demand. Moreover, the expectation of future consumption is so largely based on current experience of present consumption that a reduction in the latter is likely to depress the former, with the result that the act of saving will not merely depress the price of consumption-goods and leave the marginal efficiency of existing capital unaffected, but may actually tend to depress the latter also. In this event it may reduce present investment-demand as well as present consumption-demand.
If saving consisted not merely in abstaining from present consumption but in placing simultaneously a specific order for future consumption, the effect might indeed be different. For in that case the expectation of some future yield from investment would be improved, and the resources released from preparing for present consumption could be turned over to preparing for the future consumption … In any case, however, an individual decision to save does not, in actual fact, involve the placing of any specific forward order for consumption, but merely the cancellation of a present order. Thus, since the expectation of consumption is the only raison d’être of employment, there should be nothing paradoxical in the conclusion that a diminished propensity to consume has cet. par. a depressing effect on employment.
Next time John Taylor & Co. want to comment on Keynes and “Keynesians,” I hope they’ll do some proper doctrinal research before they start writing.
Människor som det på något vis känns som om de varit med oss hela livet är alltid svårt att mista. Det är en tröst att hans underbara musik fortfarande finns kvar — men att Ted inte vandrar vid vår sida kommer jag aldrig att kunna förlika mig med.
Första gången jag hörde Ted var jag fjorton år gammal — och idag fyller min yngsta dotter lika många år. Må himlen alltid lysa oskyldigt blå på din väg genom livet, Linnea.
[h/t Jan Milch]
Let’s look at the way economists see fiscal policy for one second. I will use three examples, John Cochrane, Paul Krugman and Lars Syll, to represent differing views on the subject. And the impression you should be left with after reading their views is that there is no general agreement at all on how to model fiscal policy, how it works, and whether it is effective.
Let’s start with John Cochrane. He is against using fiscal policy actively. Recently, he wrote this about Keynesian (fiscal) stimulus:
“Many Keynesian commentators have been arguing for much more stimulus. They like to write the nice story, how we put money in people’s pockets, and then they go and spend, and that puts more money in other people’s pockets, and so on.
But, alas, the old-Keynesian model of that story is wrong. It’s just not economics. A 40 year quest for “microfoundations” came up with nothing. How many Nobel prizes have they given for demolishing the old-Keynesian model? At least Friedman, Lucas, Prescott, Kydland, Sargent and Sims. Since about 1980, if you send a paper with this model to any half respectable journal, they will reject it instantly …
If you want to use new-Keynesian models to defend stimulus, do it forthrightly… That, at least, would be honest. If not particularly effective!“
“It’s been a bit funny on the academic front being a Keynesian during a Keynesian crisis. Much of the academic profession decided more than 30 years ago that the whole thing was nonsense and what we needed was an equilibrium model of the business cycle. By the time the utter failure of the equilibrium project became apparent, you had a whole generation of economists who knew that Keynesianism of any form was nonsense based on what they had heard somewhere, so they didn’t read any of the stuff, old or new — and were flabbergasted to learn that there was in fact an extensive New Keynesian literature that provided a justification for fiscal policy at the zero lower bound …
Now, is there a way to get a rise in consumption, and a multiplier bigger than 1? Yes. That Euler condition is based on the assumption that people have perfect access to capital markets, so that they can borrow and lend at the same rate. If some of them are instead liquidity-constrained, the increase in income from the rise in G will lead to some increase in C as well, and we have a story that is even closer to the old Keynesian version. This isn’t hard — at least it shouldn’t be for anyone with a graduate training in economics. Just try actually reading what New Keynesians write.“
Krugman’s piece is a bit wonkish for non-Economists but suffice it to say he tries to make the case for fiscal stimulus using New Keynesian models. And this puts Lars Syll, a post-Keynesian economist from Sweden, over the top:
“According to Krugman, this shouldn’t be hard at all — ‘at least it shouldn’t be for anyone with a graduate training in economics.’
Hmm. This doesn’t seem convincing at all.
1 So, according to Wren-Lewis, macroeconomics has really made progress on monetary issues thanks to central bank economists and since we have been able to definitely conclude that wages are “sticky”. Wow! That’s really impressive! (And the earth still isn’t flat?) Keynes argued that conclusively more than 75 years ago …
2 And are central bank economists really “taking an objective view”? How is it even possible to think that thought today, when the “relevant jury” for at least four years has known that these guys to a large extent were the culprits of the latest financial and economic crisis. Devoted Ayn Randian Alan Greenspan “taking an objective view”? I’ll be dipped!
3 Is ideology only playing a role when it comes to fiscal policies? Hard to believe. As already Gunnar Myrdal argued 80 years go, ideology is all over all economists. Whether they are into monetary or fiscal policies is immaterial.
4 And — perhaps most disturbing of all — in both Krugman and Wren-Lewis we see a rather unbecoming self-congratulatory attitude, according to which all macroeconomists (allegedly) share the same basic mainstream neoclassical theory, so when we discuss and argue it’s only about which policy and model to choose.“
Let me sum this up. None of these economists agree. For the non-economist, a lot of what I just quoted is dense and undecipherable technical jargon while dropping obscure names from the field of economics. Almost no one but an economist is interested in any of this. It would be really difficult to choose a story to follow based purely on the logic. And so the layperson has to pick based largely on ideological predisposition …
You get the impression from Cochrane that no one in Washington shares his anti-Keynesian stimulus views. However, the reality here in Washington is that Cochrane’s framing is popular. And this is exactly why, despite the worst financial crisis in 80 years, US government spending has grown at the slowest pace since Eisenhower.
My whole contention here is that fiscal policy is whipped out only as a last resort, Monetary policy is the only game in town. And it is because of the view Cochrane expresses, that this is so.
Absolutely marvelous — even Mikael Wiehe himself had to admit this cover was better than the original. Awesome.
It is widely agreed that a series of collapsing housing-market bubbles triggered the global financial crisis of 2008-2009, along with the severe recession that followed. While the United States is the best-known case, a combination of lax regulation and supervision of banks and low policy interest rates fueled similar bubbles in the United Kingdom, Spain, Ireland, Iceland, and Dubai.
Now, five years later, signs of frothiness, if not outright bubbles, are reappearing in housing markets in Switzerland, Sweden, Norway, Finland, France, Germany, Canada, Australia, New Zealand, and, back for an encore, the UK (well, London). In emerging markets, bubbles are appearing in Hong Kong, Singapore, China, and Israel, and in major urban centers in Turkey, India, Indonesia, and Brazil.
Signs that home prices are entering bubble territory in these economies include fast-rising home prices, high and rising price-to-income ratios, and high levels of mortgage debt as a share of household debt. In most advanced economies, bubbles are being inflated by very low short- and long-term interest rates. Given anemic GDP growth, high unemployment, and low inflation, the wall of liquidity generated by conventional and unconventional monetary easing is driving up asset prices, starting with home prices …
With central banks – especially in advanced economies and the high-income emerging economies – wary of using policy rates to fight bubbles, most countries are relying on macro-prudential regulation and supervision of the financial system to address frothy housing markets. That means lower loan-to-value ratios, stricter mortgage-underwriting standards, limits on second-home financing, higher counter-cyclical capital buffers for mortgage lending, higher permanent capital charges for mortgages, and restrictions on the use of pension funds for down payments on home purchases.
In most economies, these macro-prudential policies are modest, owing to policymakers’ political constraints: households, real-estate developers, and elected officials protest loudly when the central bank or the regulatory authority in charge of financial stability tries to take away the punch bowl of liquidity. They complain bitterly about regulators’ “interference” with the free market, property rights, and the sacrosanct ideal of home ownership. Thus, the political economy of housing finance limits regulators’ ability to do the right thing.
Maybe something for both L. E. O. Svensson and Paul Krugman to think about.
In a post up on his blog, Paul Krugman writes about “Mysterious Swedes” (emphasis added):
The Riksbank raised rates sharply even though inflation was below target and falling, and has only partially reversed the move even though the country is now flirting with Japanese-style deflation. Why? Because it fears a housing bubble.
This kind of fits the H.L. Mencken definition of Puritanism: “The haunting fear that someone, somewhere, may be happy.” … The underlying deficiency of demand will call for pedal-to-the-medal monetary policy as a norm. But bubbles will happen — and central bankers, always looking for reasons to snatch away punch bowls, will use them as excuses to tighten.
This is, however, rather too simplistic a view of the problems facing the Swedish economy today. And just poohpoohing — has Krugman already forgotten what happened in the US back in 00:s I would recommend consulting another Nobel laureate, Robert Shiller, for freshening up his memory — deeply felt concerns and fears of a housing bubble with conspiracy theories (“excuses”), is debating economic policies analogous to playing tennis with the nets down.
L. E. O. Svensson – former deputy governor of the Riksbank – has repeatedly during the last year lambasted the Swedish Riksbank for having pursued a policy during the last fifteen years that has increased unemployment in Sweden:
The conclusion from the analysis is thus that the actual monetary policy has led to substantially lower inflation than the target and substantially higher unemployment than a policy that would have kept the policy rate unchanged at 0.25 percent.
The Riksbank has more recently justified the tight policy by maintaining that a lower policy rate would have increased the household debt ratio (debt relative to disposable income) and would have increased any risks connected with the debt. But, as I have shown … this is not true. A lower policy rate would have led to a lower debt ratio, not a higher one. This is because a lower policy rate increases the denominator (nominal disposable income) faster than the numerator (nominal debt). Then the debt ratio falls …
In summary, the Riksbank has conducted a monetary policy that has led to far too low inflation, far too high unemployment, and a somewhat higher debt ratio compared to if the policy rate had been left at 0.25 percent from the summer of 2010 until now. This is not a good result.
By the way, the latest report The Swedish Economy by the National Institute of Economic Research includes a very interesting special study, ”The Riksbank has systematically overestimated inflation,” which may be important in this context. In an analysis of the Riksbank’s inflation forecasts, the NIER shows that Riksbank forecasts have systematically overestimated inflation. The NIER concludes that “[t]he Riksbank’s overestimation of inflation has contributed to overly tight monetary policy with higher unemployment and lower inflation than would have been the case if, on average, its inflation forecasts had been on the mark.”
Why the majority of the Executive Board so systematically has exaggerated inflation risks so systematically is a question that may be worth returning to.
The Swedish Riksbank has according to L. E. O. Svensson been pursuing a policy during the last fifteen years that in reality has made inflation on average more than half a percentage units lower than the goal set by the Riksbank. The Phillips Curve he estimates shows that unemployment as a result of this overly “austere” inflation level has been almost 1% higher than if one had stuck to the set inflation goal of 2%.
What Svensson is saying, without so many words, is that the Swedish Fed for no reason at all has made people unemployed. As a consequence of a faulty monetary policy the unemployment is considerably higher than it would have been if the Swedish Fed had done its job adequately.
So far, so good — I have no problem with Svensson’s argument about the inadequacy of the Swedish inflation targeting policies.
However, what makes the picture more complicated than Krugman — and Svensson — wants to admit, is that we do have a housing bubble in Sweden — it’s not just a figment of imagination the “bad guys” use to intimidate us with. [That said, I, of course, in no way want to imply that central bank interest rate targeting (and/or accommodations) is the best way to counteract housing bubbles. Far from it.]
The increase in house loans – and house prices – in Sweden has for many years been among the steepest in the world. Looking at the development of real house prices since 1986, there are obvious reasons to be deeply worried:
Source: Statistics Sweden
The indebtedness of the Swedish household sector has also risen to alarmingly high levels:
Source: Statistics Sweden
As a result yours truly has been trying to argue with “very serious people” that it’s really high time to “take away the punch bowl.”
If Svensson and Krugman aren’t impressed by yours truly’s or Roubini’s reasoning, they will maybe at least listen to a Nobel laureate. Robert Shiller is in Sweden now — collecting his fresh Nobel prize — an commenting on his earlier warnings on a Swedish housing bubble he says he still sticks to his warning.
I think that people here in Sweden have an illusion that increasing prices is a lasting trend, but that is more suggestive of a bubble.
Svenska Dagbladet December 7
Given Shiller’s track record on the issue, I think there’s every reason in the world to take his warning seriously.
Added December 8: L. E. O. Svensson is — surprisingly enough — not impressed by the arguments presented here. His comments are here (and in Swedish here). And in a couple of days another bubble denier — Eugene Fama — will receive his “Nobel prize” …